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Free Market Economy - Essay Example

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The term free market economy mainly means a system where land and capital are privately owned and the buyers and sellers are solely responsible for all economic decisions. The free market economy is usually associated with a pure capitalist system where prices influence the allocation of goods and services. …
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Free Market Economy
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Free Market Economy

Download file to see previous pages... The fact that a free market economy operates automatically is one of its major advantages. Moreover, when firms, consumers and workers pursue their own self interest through buying and selling in competitive markets, it helps in minimizing the central economic problem of scarcity, by encouraging the efficient use of resources (Lipsey 2003). In an actual scenario, however, markets fail to achieve maximum efficiency in the allocation of scarce resources resulting in inequality and unfavorable externalities therefore governments feel it necessary to intervene thus, in practice, perfect free market economies do not exist.
Even in countries like USA, Germany and France, which are considered to be practicing free market to a great extent, there are many areas that are in government’s control. For example, in USA, there are laws proposed to verify illegal trade practices. They also have a government department called the FDA (Food and Drug Administration) that ensures all consumer products that are taken in to the body are toxic free.
There are number of reasons as to why a free market ascends level of inequality and inefficiency in the economy. Firstly, a perfectly performing price system, as the case in a free market, does not provide for the issue of an ethical income distribution. In such a system, the limited supplies of goods and services are rationed out to those who can afford it. In other words, the scarce resources are usually diverted to the production of luxuries for the rich before an adequate output of commodities for the poor is produced. In addition, essential goods and services that are socially desirable may not be produced in sufficient amount under the price system because they are not profit yielding. These goods and services include health, education, defence, lighting, etc. This is the reason why the state provides, in most countries, for what are considered to be basic needs. Furthermore, a free market economy fails to consider all the costs and benefits associated with the production and consumption of commodities. Since they are profit motivated, producers tend to ignore the costs they impose on society as a result of their activities (Begg 1997). In this kind of economy, there is limited competition between firms. A few giant firms may control an industry, in such a case consumer sovereignty is affected; the bargaining position of consumers is weakened considerably while the sellers position is enhances resulting in higher prices and restricted output. Lack of competition and high profits also tend to reduce the incentive for firms to be efficient and resourceful. Due to the imperfection in market mechanism, market economy tends to further increase the disparities between people, that is, those with power and property gain at the expense of those without it. It also, due to its self interested behavior, tends to encourage greed, materialism and the acquisition of power (Sloman 1997). In my opinion, an economy should use the market mechanism to some extent and allow a certain degree of government intervention. Such economies are called mixed economies and all real world economies are a mixture of the two systems. Such a system proves beneficial for all the parties as it gives everyone the freedom to choose and produce while maintaining equality in the economy. 2.1 According to demand and supply analysis, there is an inverse relationship between the price and quantity demanded for a product. When the price for a product is too high, the quantity demanded eventually falls. Likewise, when price is low, quantity demanded increases. The movement along the demand curve is ...Download file to see next pagesRead More
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